Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Thursday, February 02, 2012

Treasury Will Work to Satisfy EU Privacy Concerns Regarding Provision of FATCA Information and Gradually Phase In FATCA Regulations

The Foreign Account Tax Compliance Act can be implemented in a way that is not overly burdensome when compared to its benefits and, over time, will serve as a complement and a catalyst to the ongoing global efforts to combat offshore tax evasion, said a senior Treasury official. In remarks at the annual meeting of the New York State Bar Association tax section, Acting Assistant Secretary for Tax Policy Emily McMahon said that Treasury is aware that FATCA imposes significant new duties on foreign financial institutions, but also noted that FATCA was enacted in the wake of serious offshore tax evasion.

She said that proposed FATCA regulations are in the final stages of clearance at Treasury and the IRS. The regulations will phase in the FATCA reporting requirements gradually over an extended transition period. The regulations will also build upon prior notices to further minimize FATCA’s administrative burden and better focus on circumstances presenting a higher risk of tax evasion.

After examining the due diligence standard for review of pre-existing accounts, the regulations set a higher threshold for further investigation into potential US ownership. Regarding new accounts, the regulations align the FATCA review with the procedures firms already follow to comply with anti-money laundering and know your customer rules.

To further focus FATCA on higher-risk firms, the proposed regulations will expand the category of firms deemed FATCA-compliant. Also, recognizing the obstacles global financial firms will face in bringing all of their affiliates into compliance, the regulations will provide temporary relief from the requirement that all members of an affiliated group be participating or deemed compliant foreign financial institutions.

Recognizing that FATCA components conflict to varying degrees with the privacy laws of other countries, Treasury is willing to arrange for government-to-government exchanges of information under reciprocal agreements. In order to avoid direct reporting, a financial institution would report the FATCA information to its home country government, which would then report the information to the IRS.

The official noted that the US already has a network of agreements providing for tax information exchanges with over 60 countries, either as part of an income tax treaty or in the form of a Tax Information Exchange Agreement. Treasury recognizes that bilateral solutions envision reciprocity. But the official noted that the ability of the IRS to provide this information to another government is conditioned on the US having in place a tax information agreement with that other government. In any event, FATCA compliance must be based on the principle of reciprocity when financial institutions based in other countries are required to provide the IRS with FATCA information.

Broadly, FATCA has three core elements: enhanced due diligence, information reporting, and potential withholding on US source payments. FATCA requires foreign financial institutions to enter into an agreement, which Treasury calls an FFI agreement, under which the firm agrees to conduct due diligence to indentify accounts of US persons and foreign entities with significant US ownership, to annually report information about its US account holders to the IRS, to close any US account if the holder refuses to waive foreign legal protections that would prevent reporting, and withhold pass through payments that the FFI makes to recalcitrant account holders and to other firms that have not entered into FFI agreements.

If a FFI does not enter into a FATCA agreement or fails to comply with its terms, US financial institutions must withhold US tax at a rate of 30 percent from the gross amount of a broad range of US source payments to the financial institution and the gross proceeds from its sales of US securities.